Australian workers face two or more miserable years as rates rise and wages fall

Australian workers are facing two or more difficult years after the Reserve Bank succumbed to pressure from markets and inflation hawks and abandoned its wages-first stance on interest rate rises.

It means that from now until at least 2024, workers with mortgages face falling real wages and significantly higher mortgage repayments due to inflation problems external to Australia.

While leaving interest rates on hold at its April meeting yesterday, RBA governor Philip Lowe said inflation is rising and the RBA only needs a little more evidence to see that it has risen “sustainably” in order to conclude interest rates should rise.

In the key final paragraph of the statement, the word “patient”, which had been in previous statements for several months and seen as a key explainer of the RBA’s stance, was dropped and a more complex phrasing introduced that suggests the central bank expects forthcoming data to show that rates will need to rise.

The final paragraph also has a weaker emphasis on wages than previous iterations.

The RBA has now abandoned its stance of waiting for wage rises to top 3%, focusing instead on the inflation rate per se. “Growth in labour costs has been below rates that are likely to be consistent with inflation being sustainably at target,” the statement says, reflecting the tone of earlier statements albeit with less prominence. However, “over coming months, important additional evidence will be available to the board on both inflation and the evolution of labour costs”.

That’s a clear warning that “rate rise looms”.

Where does that leave workers? The budget papers forecast that workers will suffer a 1.5% fall in real wages this year but there’ll be a 0.25% real wage rise next year — that’s assuming that the optimistic wage growth forecast of 3.25% is achieved. That will be followed, the government claims, by a 0.5% rise in real wages in 2023-24. But those rises are before tax, which will eat away at these tiny rises even if those wage forecasts come true, condemning workers in sectors with below-average wages growth, like construction and professional services, to persistent real wage falls.

And even those with some small wages growth won’t come close to catching up on the real wage losses they’ve endured over the past two years.

It paves the way for the RBA to start “normalising” interest rates by lifting them back above 1% and heading toward 2% over the course of the year, significantly increasing mortgage repayments, especially households lured into the property market for the first time by ultra-cheap loans. The timing is still in dispute — but not that it will happen.

The RBA’s change of stance will delight inflation hawks and financial markets, which can make far more money from betting on interest rate rises than it can from rates being stuck at one level for extended periods.

Those who have been demanding that households be punished for record low rates and that we return to an era when pummelling inflation was all that mattered will be over the moon. Demand will be smothered and households will have to direct more of their shrinking income to bank profits. None of that will be of much concern to the RBA board, now dominated by business representatives.

And if you made house purchasing and investment decisions comforted by the Reserve Bank’s repeated assurances for two years that interest rates would not increase until 2024, and would not go up until wages growth had lifted significantly, well tough luck and fool you for believing it.